firm buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days.What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.)
A)14.34%
B)15.10%
C)15.89%
D)16.69%
E)17.52%

Question

Quizplus · Accepted Answer

First, we need to calculate the cost of credit without taking the discount. To do this, we can use the following formula:

Cost of credit = [(Discount % / (1 - Discount %)) x (365 / (Days of non-discount period - Discount period))] x 100

Plugging in the values from the problem, we get:

Cost of credit = [(2 / (1 - 2)) x (365 / (45 - 8))] x 100
Cost of credit = 36.50%

Next, we need to adjust the cost of credit for the fact that the company is actually paying after 58 days instead of the stated net 45 days. To do this, we can use the following formula:

Adjusted cost of credit = (Cost of credit / (100 - Discount %)) x (365 / (Days actually taken to pay - Discount period))

Plugging in the values from the problem, we get:

Adjusted cost of credit = (36.50% / (100 - 2)) x (365 / (58 - 8))
Adjusted cost of credit = 15.89%

Therefore, the effective annual percentage cost of the non-free trade credit is 15.89%. The best choice is C.

Firm Buys on Terms of 2/8, Net 45 Days, It